Magazine

Wal-Mart Is Eating Everybody's Lunch

April 14, 2002

When supermarket chain Albertson's Inc. (ABS) announced on Mar. 13 that it was closing 116 stores in Houston, San Antonio, Memphis, and Nashville, it noted that those markets were "underperforming." And for good reason: In recent years, as Wal-Mart Stores Inc. (WMT) has added groceries to its all-in-one stores in the area, the discounter has made big inroads.

Albertson's isn't the only grocery giant feeling the pain of Wal-Mart's supermarket assault. Kroger (KR), Safeway (SWY), and Food Lion are all cutting costs and lowering prices to blunt Wal-Mart's impact. In the past 14 years, the Bentonville (Ark.) mega-retailer has built more than 1,000 of its so-called Supercenters and now claims the No. 1 spot in the U.S. grocery market. Counting grocery sales in all its outlets--including its Sam's Clubs and discount stores--Wal-Mart last year held a 16% share of the market, with an estimated $80 billion in food sales. The world's largest retailer is adding another 185 Supercenters this year.

Worse yet for its rivals, a more intense, head-on battle is coming. Over the past four years, Wal-Mart has opened about 30 of its smaller, grocery-focused Neighborhood Markets, with another 15 or 20 to be added this year. The smaller stores are easier to build in congested urban areas and offer more convenience for shoppers intimidated by the sprawling Supercenters. Wal-Mart won't talk about expansion plans beyond this year, but it could have nearly 3,000 Neighborhood Markets within 5 to 10 years, according to Chris Ohlinger, chief executive of retail consulting firm Service Industry Research Systems Inc. "The Neighborhood Markets are the traditional food retailer's worst nightmare," he says.

So far, Wal-Mart has used its low prices to lure shoppers to Supercenters sprinkled throughout the suburbs and far from city centers. But the company has had little to offer shoppers who wanted the convenience of a local supermarket.

Now it does. Having tinkered with the Neighborhood Market formula, analysts say, Wal-Mart has honed a format loaded with potential. While the break-even annual sales target of each store is about $8 million, most are doing $15 million to $20 million in business, says Burt Flickinger III, a managing director at Reach Marketing, the strategic consulting firm.

Moreover, large grocery chains look like a prime target. In a recent pricing study in Mesquite, Tex., analyst Robert Buchanan of A.G. Edwards & Sons Inc. found that on a basket of 215 goods, Albertson's price was 43% above Wal-Mart's, while Kroger's ran 39% higher.

Recently, grocers have taken to fighting fire with fire. Late last year, Kroger Co. and Safeway Inc. began selectively cutting prices to match Wal-Mart and others. But if those moves please customers, they are clearly taking a toll on profits.

Many grocers are also trying to differentiate themselves from Wal-Mart. Most have pumped up the sales of higher-margin items such as baked goods. H.E. Butt Grocery Co. and Albertson's have added drugs and gas pumps.

Will that be enough to slow the Wal-Mart advance? Traditional grocers say they aren't worried. "We have a huge head start," says Kroger CEO Joseph A. Pichler. Perhaps. But that hasn't stopped Wal-Mart from becoming the biggest player in groceries. By Robert Berner in Chicago and Stephanie Anderson Forest in Dallas